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Edited Transcript of TUBEINVEST.NSE earnings conference call or presentation 13-May-19 10:00am GMT

Full Year 2019 Cholamandalam Financial Holdings Ltd Earnings Call

Chennai May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Cholamandalam Financial Holdings Ltd earnings conference call or presentation Monday, May 13, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* S. S. Gopalarathnam

Cholamandalam MS General Insurance Company Limited - MD

* Sridharan Rangarajan

Murugappa Group Ltd. - Group CFO

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Conference Call Participants

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* Amaresh Mishra

Hsbc Asset Management (India) Private Limited - VP and Assistant Fund Manager of Equities

* Avinash Singh

SBICAP Securities Ltd., Research Division - Lead Analyst

* Bhavin Shah

Kotak Private Equity Group - Associate Director

* Prateek Poddar

Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity

* Praveen P. Agarwal

Axis Capital Limited, Research Division - Executive Director of BFSI

* SivaKumar K

Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Cholamandalam Financial Holdings Limited Q4 FY '19 Earnings Conference Call hosted by Axis Capital Limited. (Operator Instructions) Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Praveen Agarwal from Axis Capital Limited. Thank you, and over to you, sir.

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Praveen P. Agarwal, Axis Capital Limited, Research Division - Executive Director of BFSI [2]

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Thank you, Janice. I would like to welcome everyone on this call. We have with us Mr. Sridharan Rangarajan, President and Group CFO of the Murugappa Group; Mr. Gopalarathnam S., MD, Chola MS General Insurance; Mr. Arul Selvan, Executive VP and CFO Cholamandalam Investment and Finance; and Mr. Ganesh N. CFO of Cholamandalam Financial Holdings Limited. I would request Mr. Sridharan to take us through the key highlights of the results, post which we will open the floor for Q&A. Over to you, Mr. Sridharan.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [3]

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Thank you, Praveen. Good afternoon to all of you, and first for all, thank you all for participating in the earnings call.

To start with, let me touch a few key highlights and then we will have a Q&A. I have pleasure with me to join in the call Mr. Gopalarathnam, MD of Chola Insurance; Arul Selvan, CFO of Chola Finance; Venugopalan, CFO of Chola Insurance; and we also have Ganesh, CFO of our Holding company.

I hope you've had a chance to go through the presentation that we shared with you, and I'm also sure that you have gone through in detail the presentation of Chola Finance that was shared on April 30.

So first, a few updates. The name of the company has been changed from TI Financial Holdings to Cholamandalam Financial Holdings to reflect the brand of its subsidiary associated joint venture. CFHL has adopted IndAS for the first time in FY '19 for the preparation of stand-alone and consolidated financial statements in accordance with the road map described by the MCA for NBFC.

The NBFC subsidiary, which is Chola Finance, and service joint ventures, which is Chola Investments, have also adopted IndAS as per the regulatory requirement.

The insurance subsidiary, which is Chola MS Insurance -- General insurance, continued to prepare financial statement under IGAAP. They will adopt IndAS as per the IRDA guidance. However, IndAS financial statements were provided to the holding company for the purpose of consolidation by them.

There is no significant financial impact of IndAS adoption in the stand-alone financial statements. Even though the stake in Chola Finance was less than 50%, it is treated as subsidiary under the IndAS because of the de facto control concept in accounting standard. Earlier it used to be treated as an associate under the IGAAP. However, it continues to be an associate under the company's [act]. IndAS had significant impact on the consolidated financial statements of the company with respect to financial instrument measurements, valuation, impairment and derecognition.

Now I come to the stand-alone financial performance of CFHL. The company's income consists of income by way of dividend, interest and royalty for brand usage.

For the year ended 31st March 2019, the company has made a profit before tax of INR 70.91 crores after providing for a tax of INR 4.38 crores.

The profit after tax is INR 66.53 crores. Being an NBFC, statuary reserve of 20% of PAT has been created. The consolidated results of the company consist of the results of Cholamandalam Investment & Finance Company Ltd. and Cholamandalam MS General Insurance Company Ltd. as subsidiaries and Cholamandalam MS Risk Services Ltd. as a joint venture.

At a consolidated level, the revenue from operations of the year ended 31st March 2019 is INR 10,926 crores and a PAT of INR 1,415 crores.

For the year ended March 2019, the disbursement of Cholamandalam Investment & Finance Company Ltd. grew up by 21% from INR 25,114 crores to INR 30,451 crores.

Profit after tax grew up by 29% from INR 918 crores to INR 1,186 crores. Asset quality stage 3 assets at the end of March 2019 was at about INR 1,439 crores as compared to INR 1,476 crores at the end of March 2018, a reduction of INR 38 crores.

Stage 3 assets as a percentage of total gross effects improved to 2.7% in March 2019 from 3.4% in March 2018. Coverage ratio for stage 3 has also improved to 38% as of March 2019 from 34.3% in March 2018.

The capital adequacy ratio at the end of Q4 2019 was at 17.56%, Tier 1 being 12.57%. During the year, the industry faced liquidity constraints due to the restrictive supply of market funds. Despite the market concern, fiscal could raise funds because of its balance sheet strength, asset quality, Murugappa Group backing and with effective banking relationship and deploy optimally. Further, the company has been maintaining cash to support at least 1 month of disbursement.

In case of Cholamandalam MS General insurance Company, for the year ended March 2019, the company achieved a gross written premium of INR 4,428 crores, registering a year-on-year growth of 8%. Here I would like to present 3 data points. The first, H1 and H2 growth of Chola MS are for the year FY 2017, 35% and 22%; for the year -- financial year '18, 46% and 18%; and financial year '19, which is the current financial year which we are talking about, H1 was negative 4% and H2 was positive 21%, of course, overall 8%.

The second data point, crop and fire insurance contributed to 21 percentage in FY '18, de-grew by 40%, while rest of the products grew up by 14%.

Third data point, retail partners, traditional private channels and government contributed to 39% in financial year '18 and that de-grew up by 10%, while the rest of grew up by 18%.

So broadly, we faced: one, gearing up to MSIP (sic) [MISP] took some time for us perfecting H1 growth; two, DHFL contributed to INR 180 crores plus in financial year '18. And since they launched their own insurance company, the loss of business affected us. So we started bringing new partners that did affect this year. Going forward, this will be compensated; three, some of the bankrupt partners were in PCA, it is getting sorted out now and will be better this year, that is FY '20.

To a large extent, our H2 growth of 21% is encouraging, and we'll get back to the higher growth this year.

During the year, combined ratio was 104.6%. This was largely contributed by higher TP component in the last 2 years, inflation in TP and crop claims of financial year '18 and '19 were far higher.

Investment income for the year is INR 539 crores and the investment corpus is around INR 7,600 crores. The retail has been the dominant growth strategy with motor and health care insurance contributing over 75 percentage of the premium mix.

Profit after tax reduced by 3% to INR 198 crores due to the write-off and provisioning need on certain investments in the portfolio. Chola Insurance is working on a good strategy of: a, improving the product mix within auto; b, improving the OD component; c, significant focus on health insurance; d, augmenting the channel partners, scaling up agency; and e, high digital focus. This will help insurance business to grow faster and profitable in the years to come.

Cholamandalam MS Risk Service, which is the third component for this consolidated financial, is a small but niche company, reported a profit after tax of INR 3.52 crores for the year.

With these comments, I would like to now open up our Q&A. My colleagues, Mr. Gopalarathnam, Venugopalan and Arul Selvan are here. So we will be able to clarify questions from you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of Avinash Singh from SBI Cap Securities.

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [2]

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A few questions. The first one regarding your growth. Now I mean, I understand and appreciate the part that, okay, what was the things going on with your distribution partners. Now if I look in FY '20, there are two things; one is that overall, automobile, CV or the personal vehicle side, the sales growth is not looking that bright. And the second part on the TP side, where your portfolio is TP dependent, the regulator has not given any hike as so far. Now -- and you are also looking on the other hand to sort of cut out almost close on the crop side. So how are you seeing the top line growth in that -- your Chola MS coming over FY '20 because on the motor side, you had challenges and on the crop, you're cutting. So that is -- and also this motor price hike not being given, how it's going to impact the profitability? That's one. The second one is particularly on the IL&FS. Of course, you have disclosed, I guess, closer to INR 170 crores of exposure. What is the status of provisioning? I mean, where are we provisioning and what's the expectation? So these are my 2 questions, another I'll cover as follow-up.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [3]

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Good afternoon, Mr. Avinash Singh, Gopalarathnam here. On your first question, the drivers for growth for the year '19, '20 motor will be largely two-wheelers. We entered into two-wheelers in the second half and that is going to significantly add to the top line this year. We -- I do agree that [apart from] the car market is very sluggish. But at the same time, we have a very large exposure and involvement in the commercial vehicles, tractors and buses -- school buses. Our motor presence is very widespread. Therefore, we don't get direct impacted only by the new vehicles sales. Our presence in market renewals or market vehicles is quite high, particularly we have now more than 470 smart offices, which are procuring largely the market business. Therefore, I don't foresee much of a problem of growth in the current year. In fact, in the month of April, we have grown by almost 18%. So we hope that during this year, our overall growth could be anywhere within 15% to 20%. As per our motor TP is concerned, it's a temporary issue. We hope that in another few weeks, IRDA will make the announcement of price increase.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [4]

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IL&FS provision.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [5]

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As far as IL&FS provision is concerned, we have made provision in the last fiscal, and we are reviewing the situation on development during the current fiscal and we don't mind providing more if the situation warrants. That's what we are really planning at.

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [6]

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Yes. So sir, what is the status of our provision, I mean what -- I mean how much provision we have made so far?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [7]

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We've done about 25% at this stage and wherever unsecured, 100% we have provided.

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [8]

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So you have total INR 170 crores. I mean is that broke -- I mean divided into secured and unsecured?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [9]

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Yes.

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [10]

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Okay. And another quick one. I mean, you have provided that IndAS, you said sort of [translation] for FY '18 and '19. If I see FY '18, I mean, just of course, you've given what sort of an impact that will come, but if I look at FY '18, your PAT in the index is going down by some INR 40-odd crores. In FY '19, it's sort of increasing, if you were to -- can you just help me understand the components, I mean, which is leading to this sort of volatility from GAAP to IndAS in these 2 years?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [11]

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Onetime clarification, which we've made between -- somewhere in 1/4/2017. So last year, the market value for the -- based on the classification, there was a loss, which converted into a profit in the current year. So it is purely a market moment of the debt securities. We have classified into -- those in through the P&L and also the balance as a part of healthy maturity, 2 classifications we have held. So depending on the securities that are classified there and their market value, there was a dip in the profit in the last year, whereas current year, it is profit.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [12]

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Similarly, likewise in equity also.

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Operator [13]

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We'll take the next question from the line of from Amaresh Mishra from HSBC Mutual Fund.

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Amaresh Mishra, Hsbc Asset Management (India) Private Limited - VP and Assistant Fund Manager of Equities [14]

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Just wanted in context of the last question where you kind of mentioned about 20% -- 15% to 20% growth, I just wanted to get your thoughts around solvency because that has remained around about 160-odd percent, closer to the 150%. And so how do you look at solvency? Do you -- will you be infusing more capital into the business because the 20% growth and if the ROE is less than 20% going ahead or kind of be very close to the threshold and given in the context of larger peers who have like 200% plus solvency, if you can just throw some light as to how do you look the mix of growth and solvency in your business. That's my first question, and I'll come back with a couple of more questions.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [15]

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Yes, as I mentioned, the growth plan for the next 2 years will be anywhere between 15% to 20%. We are thinking of building in capital at least before the second quarter. And we are working out what should be the level of capital required, what kind of detailed calculations are going on now. So the idea is that we cannot -- since we are very closer to the solvency minimum, we don't want solvency to be the reason for not affecting growth. And therefore, we will definitely try to bring in capital by Q2.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [16]

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I think both the partners are committed for this, and I think growth will not be constrained by the want of capital.

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Amaresh Mishra, Hsbc Asset Management (India) Private Limited - VP and Assistant Fund Manager of Equities [17]

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Sure. And in the context of crop insurance, you just mentioned that in your opening comments that it was 21% crop plus something into FY '18 and which is coming down. Incrementally, from a mix perspective, how do you look at crop insurance? Do you see that coming down further in our total mix? Or -- I mean, are they remain around these levels? So just wanted some additional clarity in terms of like what you mentioned in terms of crop insurance? How do we look at it?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [18]

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See, we have exited crop insurance for the fiscal year '19, '20. We have not renewed our reinsurance contracts and we don't want to wait for any of the programs of crop insurance, whether it is Kharif or Rabi for the year '19, '20. I think it will become 0. But having said that, we are also developing retail crop insurance products, which will be some kind of top up over the government program, which will be economically priced and fully reinsurance supported.

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Amaresh Mishra, Hsbc Asset Management (India) Private Limited - VP and Assistant Fund Manager of Equities [19]

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Okay. And these will be sold to the...

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [20]

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There is a company called MSI GuaranteedWeather. This company is in US, which is part of the Mitsui network. And they are going to help this year to evolve and develop retail crop insurance products. So in the long term, if at all we have preference in crop insurance, it will be pure retail, not government programs, which will essentially sits on top of a government program.

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Amaresh Mishra, Hsbc Asset Management (India) Private Limited - VP and Assistant Fund Manager of Equities [21]

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Okay. Okay. So just one more question. If you can just broadly give us in terms of mix in the motor OD and TP business, currently like what would be the mix between passengers, two-wheelers and CVs? Any numbers around that if you can just throw out just to help us.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [22]

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So last year, mix is not relevant because two-wheeler is getting added in a significant manner. We started two-wheeler from October, slowly ramped it up to about 1 lakh policies in March, and current year target is 2 lakh policies per month. So it has significantly changed the mix. Of course, we were largely -- we were almost 60% commercial and rest of the -- rest 40% noncommercial vehicles. This will undergo a change once two-wheeler comes in.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [23]

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As stated earlier, our strategy is that, see, motor is a significant part of the market. So now the question is that how we have to get in this market in a profitable way by changing the mix, region and also the profile what we are taking. So that's what Mr. Gopalarathnam is telling, like how the mix has changed and how it'll become profitable in the years to come.

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Amaresh Mishra, Hsbc Asset Management (India) Private Limited - VP and Assistant Fund Manager of Equities [24]

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Okay. And noncommercial, when you say, what it would be? I mean it would be like 60% commercial, we understand. But when you say 40% noncommercial, what would be the -- I mean what would be the...

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [25]

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In commercial, we reckon essentially the, what is called, PCCV and GCCV, passenger carrying commercial vehicle and goods carrying commercial vehicle. Noncommercial will mean private car, tractors. Then, miscellaneous -- there is a category called miscellaneous vehicles, which is all the earth moving equipments, dumpers, tippers, et cetera. There are almost 53 categories of miscellaneous vehicles and those kinds of things.

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Operator [26]

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Your next question comes from the line of Bhavin Shah from Kotak Investments.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [27]

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I have a few questions. One is, if you look at from an industry perspective and our market share across various segments, particularly in health and motor OD, it seems like our growth has been quite muted and I know you mentioned a bit on the distribution challenge earlier in the call, if you could give us a little bit more color into that and some understanding of what happened and what's our plan going forward for both of these?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [28]

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The first is, the MISP regulation has been a major, I would say, event that happened in the industry in the last 18 months, and this was implemented from November 2017 and where there was a cap on the intermediate -- now for the first time, the auto dealers became IRDA-registered licensed entities, and November '17 to March '18 the company was following the IRDA directions. And -- but the market went in a very different manner where the first impact of MISP was that the pricing came down because intermediation payout levels were controlled. Therefore, the dealers and OEMs were pushing for a higher discount on motor OD. And that got implemented, let's say, from November '17 till, let's say, April-May '18. But April-May '18, we -- when the pricing came down, also the old story of leaving the dealers more than what IRDA gave, that practice became very prevalent in the market. As Chola MS, we were holding it till July-August because we are wanting to see whether discipline comes. So we didn't want to be the first movers in violation. Again, somewhere in August-September, we opened up before the growth was muted and OD really affected us in the last year growth. But having said that, as Sridharan mentioned, the fourth -- the second half on fourth quarter, particularly fourth quarter, our growth rates came back to 30%, and the second half was 21%. Q4 was almost 13%. So we got back to growth and that is a broader story which happened in the market. The MISP regulation has been a very important event from a regulatory perspective and then it has changed the dynamics of motor OD both in terms of growth and profitability for the company.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [29]

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On the distribution side, particularly banks or NBFCs, do we have any exclusive arrangements with any of them? And particularly if we were to look at the share amongst the various partners, could you give us a sense on any large concentration with any of the banks or NBFCs for our business? And any change in terms expected or ongoing discussions on that?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [30]

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If you look at the slide on current partnerships, which was given, most of the partnerships are open architecture where more than 1 partners are there. Except in 2. One is, of course, a part of Murugappa Group, which is Chola, where we are the exclusive partners for all lines of business. And in banks, we have an exclusive partnership with IndusInd Bank. Other than these 2, by and large, everywhere it is open architecture, where 2 to 3 partners are there.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [31]

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And particularly, IndusInd would be how large for us, if you could share? And any ongoing discussions are there regarding -- because somewhere IndusInd wants to break into this by way of some stake acquisition or some other form.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [32]

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See, we renewed the contract with IndusInd for the next 5 years last year. So up to 2023, for the first time in the industry, so it's the first where the third phase of expansion or extension happened. So we are protected till 2023 as per the current contract.

And as far as the company, currently the exposure to industry is between 18% to 20%. And we expect that in 3 years' time, this concentration will come down to around 10% because of broad-basing more such partners. And also the growth of the SMO channels, smart offices, which is our own channel, so proliferation of our own -- more channels and growth in our own channels, all these will add to reduced concentration risk on IndusInd Bank for us.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [33]

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And the new contract is also exclusive with IndusInd?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [34]

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Yes. For the next 5 years, up to 2023.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [35]

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Okay. And 2 points related to distribution. One is, do we -- have we any got any tie-up with Maruti now that was probably in the works?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [36]

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Yes. Yes, Maruti, we signed a tie-up and business is expected from June. Currently, the IT integration work discussions have started. So in the month of -- in another 30 days, we will complete the IT integration and in June middle or so the business will start.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [37]

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Fantastic. And around competition, a lot of spend we're seeing around digital part of the insurance. You have new firms like Acko, Digit, who have been funded and we are seeing a lot of online-only kind of competitive intensity increasing. How are we looking at this? And what is our thought to cope up with digital insurance companies?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [38]

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Okay. Now we have set up 2 important divisions, exclusive profit centers within Chola MS on 1st of April. One is health accident travel. We call it HAT. And second one is digital. Now digital is now becoming a separate SDU under -- within Chola MS. Actually, 1st of April, we've moved into SDU culture in Chola MS. We have shifted from a functional organization to a profit center organization. So now we have motor, SME commercial, health accident, travel, government and rural and digital, 5 SDUs in Chola MS. These SDU heads are profit center heads, who will completely control business, underwriting, claims, products, actuarial, IT, everything.

Digital is a very large piece, and we are looking at -- recently we have signed up with MobiKwik for partnership with them. This is the second one to do after ICICI Lombard. So digital partnership is a large piece of our digital strategy. Digital, we are looking at in 4 ways. One is what we call D2C, digital to customer; digital partnerships; digital renewals; and digital technology and interfaces with other functions within Chola MS. So we're trying to look at in 3 or 4 dimensions of digital. It'll become a very large piece in the next 3 years. Almost 10% of the business will come in digital in the next 3 to 4 years.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [39]

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Okay. On the P&L side, a couple of questions I'm having. If you were to look at your claims ratio across segments, especially relative to competition and to previous year, how -- I mean, we don't have that data in the presentation, but some sense from your side as to how the claims ratios have moved for us, particularly relative to competition on various subsegments.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [40]

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See, we will have the best claim ratios across all LOBs other than crop and motor third-party. In every single line of business, Chola MS claim ratio measured as NIC/NEP will be the lowest. And in crop, last year, we've almost provided 120%. We're likely to hit more than 120%, but we have a secondary reinsurance protection, which will stop our loss at 120%. And motor third-party because of our mix of third-party is almost 40% and because of that, the weightage of -- it is not due to the loss ratio because our loss ratios are finally well provided. Also our business mix in third-party is quite favorable and the claims negotiated settlements are very high. Despite that, mix is large. It takes a higher share in the overall NIC/NEP of the company. So barring these 2, in every other line of business, our NIC/NEP will be one of the best in the industry.

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Operator [41]

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Next question is from the line of Prateek Poddar from Reliance Nippon Life.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [42]

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Couple of questions. One is in health, if I were to look at your growth versus the industry, you have been underperforming. Why is that, sir, particularly in financing?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [43]

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See, there are 3 segments. One is retail health, group health and government health. We are not present in government health. We are not present in group health. Group health will be very limited, just to satisfy our Japan, Korea customers because we are giving a bouquet to them. And commercial customers, we almost stay away from group health. Group health has got a very poor loss ratio track record, and we don't want to waste our time investigating and burning underwriting profits. So our preference is largely in retail, and therefore the overall ratio of health seems less.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [44]

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No, sir. Even if I look at...

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [45]

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Just now I mentioned that we have set up a separate division from 1st April, HAT, whose main job is to really take the retail health to the next level, largely focusing on the agency. So far we were very strong in the bank assurance and retail health. But now, we are really going to grow very significantly in the agency channel and that will be our future growth engine as far as the health is concerned, in addition to the digital channel.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [46]

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As it is renewed focus is on health, you develop products, process digital processes and also the retail network. I think we will see this benefit in at least the next 3 years to come. They would behave as if it is an independent company, but under the umbrella of Chola MS.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [47]

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That's good to hear. Sir, just one small question over here, is it fair to say like, even in the retail health part, we have been underperforming when it comes to the growth seen in stand-alone health insurers. So going forward with this renewed SDU kind of a structure, you would likely be more aggressive in this segment or would like to be more aggressive in this segment and have higher growth?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [48]

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Correct. I think what Mr. Gopal said is that, I think, our concentration today is largely health insurance through bankers and retail is very less and that's what we are changing the strategy. We will continue to have bankers as one of the key partners to grow with this business, but retail will be the biggest focus, and you will see that happening in years to come.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [49]

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Understood. That's good to hear. Sir, secondly, if I were to look at your [CPT] and the channeling performance -- channel-wise performance, OEM channel -- I mean, in the last 4 or 5 years, OEM channel has just not grown, in fact it's flat. Why is that so? OEM, I think, is a significant revenue generator, though.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [50]

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OEM channel, last year, we got -- actually, OEM channels were, to be very honest, till 2 years back, they were not profitable because of very large payouts to the dealers and also the large loss ratio because OEM channels also tend to have a high loss ratio. And having said that, last year, we took a re-dig in our strategy where we saw the coming in of the long-term policies from IRDA and felt that if you're not in the OEM channels, then you are blocked for 3 years in private car and 5 for two-wheeler. So last year, we saw that even 6 months ahead of September last year. April this year, we started kick-starting our OEM endorsement programs. Actually, last year, we got into Hyundai tie-up and also Tata passenger car tie-ups. But from October onwards, when the two-wheeler 5-year policy came, we started doing two- or three-wheelers category in a big way. Before that -- right answer to your question is, it was not profitable 2 years back. The oncoming of long-term policies made us realize that we must get into OEM and not to stay in the market for 3 to 5 years of the new vehicles which are acquired and you also -- I mentioned earlier, this Maruti tie-up also was integrated last year and business is going to start coming from June onwards this year. So that's the background to the OEM strategy.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [51]

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Understood. Sir, just once more clarification, what is this retail government channel? I am not aware of it. How do you define retail government channel?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [52]

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Retail government is largely crop, largely crop insurance.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [53]

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Okay. And sir, I do understand that your intention is not to underwrite crop, but if I were to look at the numbers of March, unfortunately, April numbers are not out. In March, I see some bit of crop writing undertaken by us? Why is that, sir?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [54]

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See, Rabi too -- all these are contracted crop insurances. What I'm saying when exiting -- I'm exiting from Kharif 2019 and Rabi 2019. That's what we mean by exiting. You know crop insurance operates in 2 seasons, Kharif and Rabi.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [55]

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Yes, I am aware of it. Sir, next season onwards, we are out of stock?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [56]

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For Kharif 2019, we have not bid anything. And Rabi 2019, we have not bid anything. There is still some carryover premium. Even in this year, we may account some INR 20 crores to INR 24 crores because reconciliations are going on with the various states in terms of money deposited and things like that. So, therefore, this year also -- this first quarter also, there could be some spillover accounting INR 20 crores to INR 24 crores. But then there are all Rabi 2018 spillovers, but Kharif '19 and Rabi '19, we are out of crop.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [57]

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And sir, just to understand, you talked about 2 days ago, OEM channel not being profitable and now with the introduction of 3 and 5 years to be relevant in the market, you have to go into the OEM channel, but does that mean that this is at the cost of profitability?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [58]

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We have a continuous challenge to grow our book as well as stay profitable. It cannot be that you are doing one at the cost of another. It has to go parallel. We must have some reasonable preference. Also, we must tend to be profitable. Particularly in the scenario where all the new cars are going to be done by the OEMs in the new MISP regulation, and those new cars are going to have 3-year insurance of bundled along with the new year -- new car sales, and the two-wheelers, new vehicles bundled with 5-year sales, there is no way you cannot -- you can stay away from this. And that is the reason why we wanted to get -- it's not as though we didn't have OEM relationships earlier. We had Toyota. We had Ashok Leyland, Nissan. A few other OE -- Isure, Mahindra were there. We added Hyundai. We added Tata. We added Maruti now. So that we're across the cross section of OEMs both in the passenger vehicles and commercial vehicle space.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [59]

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But is this ROE diluted in the sense, I mean, obviously, you have to balance, I understand, but is that a matter of philosophy when we try to underwrite products? What is in the back of the mind? Is it ROE which is governing it or it is growth? What takes precedence over that?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [60]

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I think it's a balance of both. I think that's what Mr. Gopal said that. In a bouquet of products, region, channel, all these will contribute to our achieving this balance, growth versus us. So we would like to have a profitable growth, and that's the aim of the company and we consider all those elements to that.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [61]

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So is it fair to assume that we are talking about profitable growth that in the next 2 or 3 years when it comes to combined ratio, we could head towards 100% and then eventually lower than that?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [62]

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I'm not sure next 2 years, but I think, we will be -- we are progressively going towards that. I mean, it is not just going there, but we need to sustain this. I think that's what we're trying to really aim for. But the number -- the years that you are telling is definitely not one that we would -- we should really aim for. But I think we will be close to that.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [63]

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That's wonderful to hear, sir. Last 2 questions. One is, in your PPT for two-wheelers, there is no mention of which auto OE we are tied up. So maybe if you could mention that. And secondly, out of your banker channel, how much will be IndusInd? And how much will be Chola, I mean, Chola Investment & Finance?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [64]

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As far as the two-wheeler is concerned, our strategy is slightly different. In the sense, there we are not looking at the OEM tie-ups as a group to grow two-wheelers, largely because many large OEMs have left it free to the dealers to operate. It includes Honda, it includes [here] TVS. Secondly, the two-wheeler market is also organized in a very different manner where the OEMs don't have control on the dealers across the entire geography of the country. Therefore, leveraging on our SMO channels, we are tying up with the local dealers so that the servicing can be done locally by our smart offices. And that is the unique position we are taking as far as two-wheeler is concerned. Actually, we are doing very well. In the month of April, we have done as much as INR 30 crore in two-wheeler, which is largely contributed by the SMO channel in a very big manner.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [65]

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Sir, what do you mean by SMO, smart offices?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [66]

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Smart offices, yes.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [67]

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Okay. So you're tying up for relevance or basically you're saying that you are more dealer focused rather than OEM focused in the sense you want to go to every dealer and then kind of increase your mind share than presently you can, is that the way you are going?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [68]

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Sorry, we couldn't hear you well.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [69]

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No, no, what I was asking is the strategy in two-wheeler, is it more dealer-wise, as in every dealer you're trying to go and explain your value-added or concept and then take market share within every dealer and have more mind share, that is the way you are going rather than the OE way?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [70]

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Yes, correct.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [71]

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Okay. Okay. That's good to hear, sir. If I may also ask, how much would be your long-term book now, in the sense long-term third-party two-wheeler book, how much will that be?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [72]

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I think it is just building. It's too early to share these details because you know this is a scheme that IRDA has just announced. So everyone is working towards that.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [73]

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Okay. And I mean -- I'm sorry -- Sir, the question on banker, how much would be Chola Finance and how much would be in IndusInd?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [74]

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I think we earlier shared.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [75]

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Yes, I shared, IndusInd is about 18% to 20% and Chola is around 10% to the total premium -- total company premium.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [76]

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And sir, IndusInd would be mostly focused on health, is it fair to assume?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [77]

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No, both Chola and IndusInd are vehicle-lending institutions. So obviously motor will be the large piece.

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Operator [78]

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(Operator Instructions) Next question is from the line of SivaKumar with Unifi Capital.

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SivaKumar K, Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager [79]

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And sir, just to reiterate the growth guidance and the premium, you said, you expect to grow by 18% to 20%, sorry 15% to 20% this year, instead of going slow is the crop insurance, right?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [80]

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Yes.

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SivaKumar K, Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager [81]

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And what is the segment which will make up for the absence of crop insurance?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [82]

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It will be largely the new entry into two-wheelers plus health accident and travel and more in the property business.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [83]

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Also, on the fire side.

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SivaKumar K, Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager [84]

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Sir, and this year, the combined ratio had spiked up to 104.6, so you said crop claims was the one aspect which led to that and you also said higher TP component. Can you explain how the higher TP component is relating to the higher combined ratio?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [85]

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I explained that more from a NIC/NEP perspective, claim ratio why it is high, last from 76%. So the high component of claim ratio, in a way it's also combined ratio, with 40% plus on motor third-party. Obviously, if third-party has 92%, 93%, then the overall combined ratio tends to be higher.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [86]

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SivaKumar, if you see that motor OD basically was highly at about 55%, 56% in '13, '14 and slowly our TP ratio has increased in the last 2 years. So higher the TP, the higher the loss ratio, and that was the combined ratio, and obviously that is what is triggering the highest combined ratio.

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SivaKumar K, Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager [87]

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Right. Sir, and what are the sources of capital raise that you are planning for in Q2? Will you be calling for equity from the shareholders?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [88]

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The shareholders are there, both the partners will take the call. We have excellent JV partner and both of them will take a call.

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SivaKumar K, Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager [89]

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And any plans of making MS Chola Insurance public, sir?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [90]

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Not in the recent times.

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SivaKumar K, Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager [91]

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Correct. Sir, on the status of the health insurance, which was started last year, any -- what's the progress in terms of operations and capitalization?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [92]

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I think we -- Sridhar mentioned it. Now the strategy is to create a company within company. As I mentioned, we created a new division from 1st April. They will operate as though it is a separate company, but it is within Chola MS. So the plan -- there won't be any separate health insurance company.

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SivaKumar K, Unifi Capital Pvt. Ltd. - Associate VP & Fund Manager [93]

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I see. So it will be taking care of all the retail health business, which MS Chola was doing all the while, right?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [94]

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As a division. Anyway, it is within Chola MS itself.

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Operator [95]

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Next question is from the line of Bhavin Shah from Kotak Investments.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [96]

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What kind of growth expectation from two-wheelers? One of the expectations from the industry is electric two-wheelers are gaining or expected to get -- gain a significant market over the next few years. Are we kind of there to tap that opportunity?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [97]

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Two-wheeler, electric?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [98]

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Electric two-wheeler.

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [99]

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Yes, yes, see, two-wheeler is two-wheeler whether it is electric or petrol or diesel. If the OEMs are selling, if the dealers are selling, we are there. So we just piggyback on the dealer who sell the two-wheeler and then we are there to give the protection requirement for the two-wheeler buyers. Having said that, the motor technical claims will have to necessarily get more training in the electrical vehicle compared to the diesel or petrol vehicles. So that will be the effort, which we will be making to make the claims department more alert and aware in terms of the technical aspects of claims management in electric two-wheeler. That's an effort which we'll do from the company. But from a business point of view, definitely we will follow the market.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [100]

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Okay. And one last question on the investment book, do we have any large exposures which could have any negative surprises like the IL&FS and the quantum thereof if it's relevant?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [101]

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Yes, I think as of now, by and large, IL&FS is the thing which is everyone is worried about, and I hope once the new government comes, there will be some kind of resolution because it is such a too big an animal so it has to be resolved properly. And I think that's something which is worrying all of us, and I think hopefully -- but we are prepared in terms of our gearedness to make provisions, et cetera. But I think, a positive resolution will really help the industry in particular, and I mean, both banking and nonbanking as well as the insurance industry.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [102]

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Actually, the question was, I mean, are there any other such large exposures which could be under the watch list because we've seen in the recent past, right, from Essel Group to DHFL?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [103]

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We don't have such things, DHFL, Essel, et cetera, but I think, we are mindful. We are recalibrating our investment decisions. We are putting more [features] in terms of investment. But nevertheless, given the constraints of what IRDA investment regulation tells, you have very limited choice to make in terms of where to invest. But having learned the story from IL&FS, we are becoming more and more prudent and careful. So that's the learning from that.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [104]

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And what would be the yield on the investment book -- existing investment book right now?

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S. S. Gopalarathnam, Cholamandalam MS General Insurance Company Limited - MD [105]

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7.9%.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [106]

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So about 7.9%.

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Bhavin Shah, Kotak Private Equity Group - Associate Director [107]

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7.9%. And one last question is, I mean, you have capital raise coming in next quarter or 2. But finally at the holding company level, what is the thought process to kind of unlock value for shareholders between we have 2 big entities Chola, the NBFC and the insurance? What has been the thought process right now from the management perspective to unlock some value there?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [108]

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Bhavin, we have not 2, but 4. There is a home loan book, which is we would likely to take it to the next level and similarly home insurance book, which we'll take it to the next level, and the insurance. So we are aware of this, and we would like to do the best to the shareholders, and we'll make sure that the funds are made available to these companies, which are making really good growth as well as profitable growth. At the same time, we'll also look at how to unlock value. So I think that the point here is that first our aim and endeavor is to support the growth for all the businesses that CFHL holds and the next is to see how to unlock the value in time to come.

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Operator [109]

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We take the next question from the line of Prateek Poddar from Reliance Nippon Life.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [110]

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Sir, just one small question, in terms of the capital raise, how do you plan to fund it? In the sense, would you use the stand-alone balance sheet, or do we have enough cash on stand-alone balance sheet to fund the upcoming capital raised by Chola General Insurance?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [111]

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Yes, I think as I said in the previous question, in fact, I think we have stand-alone strength, but we will also see wherever it's required, we will augment fundraising within the parent company and there are multiple choices that we can exercise.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [112]

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But there will be no dilution at the holding company level?

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [113]

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Yes, I don't think so.

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Operator [114]

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Well, ladies and gentlemen, that was the last question for today. I would now like to turn the conference over to Mr. Sridharan for his closing comments.

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Sridharan Rangarajan, Murugappa Group Ltd. - Group CFO [115]

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Yes, so I think thanks and one key thing that we would tell here is that we will have this call continue at least twice a year and obviously you can reach us out. We will improve this communication that we have from CFHL. I think we have 2 strong companies both Chola Finance, which is galloping and doing at a great speed as well as profitable. They have done wonderful things and in terms of the slight liquidity situation, they have done a good job. At the same time, Chola Insurance will -- I think, but for an aberration of -- at the first half of last year, I think, Chola is the finest profitable insurance company, and I think it has got -- re-charted their growth plan, and I think we will share more as we progress in the next 2 years. But I can tell that it has installed a lot of good actions, and we will have greater results to come in the coming years.

With that, I think wish you all the very best, and thanks a lot for participating. Bye.

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Operator [116]

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Thank you. Ladies and gentlemen, on behalf of Axis Capital Limited, we conclude today's conference. Thank you for joining. You may disconnect your lines now.